FCA says millions of drivers to get average £830 car finance payout

(Sharecast News) - The Financial Conduct Authority confirmed on Monday that millions of drivers who were mis-sold car finance will be entitled to an average of �830 in compensation.

The financial watchdog said in a statement that 12.1 million agreements made between 2007 and 2024 are now eligible for compensation. This is down from 14.2m announced in October, but the average payout has increased from �695.

The FCA estimated that 75% of eligible consumers will make a claim, which would take the total redress paid to �7.5bn.

Drivers will only be compensated if they were not told clearly either that their dealer or broker set the interest rate to earn more commission, the commission was high (at least 39% of the total cost of credit and 10% of the loan), or the dealer or broker was using one lender or gave one lender the right of first refusal - a so-called tied arrangement.

The FCA said lenders will have three months from the end of the implementation period to inform complainants whether they're owed compensation and how much. This means that people who have already complained or who complain before the end of the relevant implementation period will be compensated sooner.

Lenders will only contact people who haven't complained if they are likely to be owed money.

FCA chief executive Nikhil Rathi said: "We've listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put �7.5 billion back into people's pockets.

"Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure. Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future."

Close Brothers, which has set aside �300m for the redress, said in a brief statement that it was "assessing the potential implications" of the scheme. "The group will update the market as and when appropriate," it added.

Lloyds Banking Group has made a �1.95bn provision, while Barclays has set aside �325m.

Peter Rothwell, head of banking at KPMG UK, said: "Today's announcement gives lenders and the market greater clarity on how the motor finance redress scheme will be put into action. While the final rules reflect some changes to eligibility and redress - with estimated payouts decreasing from �8.2bn to �7.5bn - the FCA has stood firm on the main criteria and this remains a substantial exercise. With an initial start date of June 30 2026, lenders must now unpick the detail and move quickly from planning to execution.

"The FCA has made the decision to implement two schemes, one covering April 2007 - March 2014 and another April 2014 - November 2024. This could help to speed up the process for some consumers, but also risks causing confusion for others.

"As the industry works through this detail, attention will turn to whether any elements of the scheme face further scrutiny or challenge."

Danni Hewson, head of financial analysis at AJ Bell, said: "Buying a car is often the biggest purchase people make outside of a home, and the process can be stressful and confusing. Once you've picked the vehicle you want the next step is working out if you can afford it, and many people never look past the monthly payments to consider how much interest they will be paying or whether there might be a better deal out there.

"The FCA is demanding more transparency from lenders going forward and discretionary commission arrangements have already been banned. But without the option of finance most people would struggle to find the cash to fund vehicle payments and there have been concerns that lenders could limit the products made available to motorists if compensation costs spiralled.

"The tightening of criteria by the FCA will keep compensation payouts to �7.5 billion, down from the �8.2 billion that had initially been reported during the consultation process. Lenders will only be required to contact motorists who are due compensation, which will also help keep down the cost of managing compensation schemes.

"Finding the paperwork from loans dating back to 2007 might be impossible for many people and some may be tempted to use claims management companies which will take a chunk of the total compensation payout. But putting the onus on lenders to contact those owed compensation should remove the need for motorists to use third parties and the FCA has also set out plans for a taskforce to monitor those companies already handling claims to protect consumers.

"There are still fears that scammers will now rush to exploit the situation and people should be careful when receiving emails or text messages which call for quick action in relation to making a claim.

"Under the scheme, eligible motorists should get compensation this year. However, there is still the potential that further legal action from either lenders or complainants could delay the process."